AMR Profit Up On Capacity Cuts, Higher Fares

October 18, 2007

American Airlines parent AMR's third-quarter profit rose as it raised fares and cut the number of seats it had in the air.

The results came in slightly stronger than expected and initially sent AMR's share price up more than 4 percent. But the carrier warned that some costs were likely to rise in the fourth quarter and some of the gains were retraced.

The positive earnings from the world's largest airline followed results from Delta Air Lines, which on Tuesday reported a stronger-than-expected profit on cost controls.

AMR Chief Executive Gerard Arpey said in a statement that the earnings were solid despite soaring oil costs and volatile weather. He said, however, that oil prices are a serious concern for AMR.

"We have led several (ticket) price increases with the run-up in oil prices lately, and we'll have to see where all that settles out in the market. But I think it is fair to say we are alarmed at the level of oil prices as we see them today," said AMR Chief Executive Gerard Arpey.

Profit increased to USD$175 million, from USD$15 million a year earlier, when the airline recorded a USD$99 million non-cash charge.

AMR said special items in the third quarter included a charge of USD$40 million related to salary and benefit expenses from prior quarters.

The airline industry has been recovering from a years-long slump, due largely to low-fare competition and increasingly high costs. Top carriers, however, have managed to cut capacity and raise fares.

American cut the number of seats on flights it owns and operates by 2.8 percent in the quarter, compared with the third quarter of 2006. Meanwhile it flew fuller planes, selling 83.9 percent of its seats, which the company said was a record.

AMR's yield, which represents average fares paid, increased 2.3 percent from the year-ago period. The company ended the third quarter with USD$5.8 billion in cash and short-term investments, including a restricted balance of USD$447 million.

"I'm relatively positive on their earnings for 2007," said Hannes Smarason, chief executive at FL Group, an Icelandic private equity firm that owns about 9 percent of AMR.

Smarason noted AMR's "demand outlook for the fourth quarter and their ability to push through price increases to offset some of the fuel increases."

But he said that AMR needs to be more aggressive in pinpointing ways to increase shareholder value. FL Group urged AMR to consider strategic alternatives last month such as spinning off its frequent flyer program.

"They need to be more concerned with speed," Smarason said. "I just think that they're a little bit complacent."

A recent surge in the price of crude oil has cast a shadow over the airline industry as it struggles in its recovery.

The price of jet fuel is directly affected by the price of crude oil. NYMEX crude futures have traded at record highs touching USD$89 a barrel on Wednesday, a sign that airlines may have an even bigger fuel bill in the fourth quarter.

Carriers, however, have hedged their exposure to energy markets, often locking in prices below the market.

AMR said it has 40 percent of its anticipated fourth-quarter fuel consumption capped at an average crude oil equivalent of USD$69 per barrel, which is the jet fuel equivalent of USD$2.01 per gallon.

AMR said it expects to further cut capacity 2.2 percent in 2007 with a 2.4 percent reduction in domestic capacity and a 1.9 percent reduction in capacity on lucrative international routes, where American faces less competition.